Kratos Reports Third Quarter 2017 Financial Results

Kratos Unmanned Systems Business Revenues of $41.6 Million Increase 127.3 Percent over the Prior Year and Increase Sequentially 87.4 Percent over Second Quarter 2017 Revenues

Third Quarter Bookings of $228.7M, Book to Bill Ratio of 1.20 to 1.0

SAN DIEGO, Nov. 02, 2017 (GLOBE NEWSWIRE) -- Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS), a leading National Security
Solutions provider, today reported its third quarter 2017 financial results. For the third quarter ended October 1, 2017, Kratos generated Revenue and Adjusted EBITDA of $196.2 million and $14.5 million, respectively. Third quarter 2017 Revenues increased 18.6 percent over the third quarter of 2016 and 5.7 percent sequentially over the second quarter of 2017. Third quarter 2017 Adjusted EBITDA increased 26.1 percent sequentially over second quarter 2017 Adjusted EBITDA. Third quarter 2017 bookings were $228.7 million, resulting in a Book to Bill Ratio of 1.2 to 1.0. Backlog at October 1, 2017 was $798.9 million. Kratos Bid and Proposal pipeline at the end of the third quarter 2017 was $6.6 billion, up from $5.9 billion at the end of the second
quarter.

For the third quarter ended October 1, 2017, Kratos' Unmanned Systems generated year over year revenue growth of 127.3 percent, from $18.3 million in the third quarter of 2016 to $41.6 million in the third quarter of 2017. Kratos Unmanned Systems' Adjusted EBITDA of $5.0 million was up 400 percent over Adjusted EBITDA of $1.0 million in the third quarter of 2016. Contributing to Unmanned Systems' revenue growth was the commencement of Low Rate Initial Production (LRIP) on a new unmanned aerial drone system for a U.S. Government customer, and production on multiple new unmanned aerial drone system programs. Kratos' Unmanned Systems Book to Bill Ratio in the third quarter was 1.4 to 1.0.

In the third quarter of 2017, all
Kratos reportable business segments generated year over year organic revenue growth from 2016. Kratos' largest business unit, Satellite Communications, Cyber Security, Technology and Training Solutions, which is the Company's largest contributor of Revenue, EBITDA and Cash Flow generation, had a strong third quarter, including reporting a Book to Bill Ratio of 1.3 to 1.0. For the third quarter of 2017, approximately 60% of Kratos' revenue was derived from U.S. Federal Government related customers, approximately 28% from commercial, state and local government customers, and approximately 12% from international customers.

As expected, the operating profit and Adjusted EBITDA for Kratos' Government Solutions segment had a less favorable mix of products sold during the third
quarter of 2017 as compared to the prior year. The Company expects a more favorable mix of revenues in the fourth quarter based upon production and execution schedules, which is expected to result in higher operating and Adjusted EBITDA margins for the Government Solutions segment.

For the third quarter of 2017, adjusted income per share was $0.03 and net loss was $4.3 million. Adjusted income per share excludes loss from discontinued operations, non-cash amortization expenses, as the Company has historically been acquisitive, non-cash stock compensation costs, foreign transaction gains and losses, and certain non-recurring items such as acquisition and restructuring related items and other, and includes cash actually expected to be paid for income taxes on continuing operations, reflecting the benefit of the Company's net
operating loss carryforwards of over $300 million. Kratos believes that reporting adjusted income (loss) per share is a meaningful metric to present the Company's financial results. GAAP earnings per share were a loss of $(0.05).

Kratos is adjusting its full year 2017 guidance for revenues of $720 to $740 million, to $735 million to $745 million, and affirming its full year Adjusted EBITDA guidance of $52 to $54 million. Kratos is providing fourth quarter 2017 revenue guidance of $185 to $195 million and Adjusted EBITDA guidance of $15.4 million to $17.4 million.

Eric DeMarco, Kratos' President and CEO, said,
"Kratos had a solid third quarter, beating both our revenue and EBITDA forecasts, with strong performance by each of our core businesses, Satellite Communications, Microwave Electronic Products, Unmanned Systems and Training Solutions. Kratos' work on multiple ballistic missile defense programs, which we support across the majority of the Company, was also solid in the third quarter. In the quarter, Kratos' Unmanned Systems Division, in particular, generated significant organic growth and returned to profitability, as we commenced production on a number of new programs, and as we reduced certain investments we have been making. We expect our unmanned systems business to grow rapidly over the next several years, based on existing programs, contracts, backlog, and new opportunities we are pursuing, with the business expected to double in revenues from 2016 to 2018."

Mr. DeMarco continued, "Similar to last year, we are looking for Kratos to finish 2017 very strongly, including generating the fiscal year's highest quarterly Adjusted EBITDA in the fourth quarter, based on third quarter bookings, backlog, expected contract mix, and forecasted delivery and execution schedules. In particular, we are forecasting Kratos' Satellite Communications, Cyber and Training Solutions business, our Company's largest revenue, profit and cash flow generator, which reported a book to bill ratio of 1.3 to 1.0 in the third quarter, to have a particularly strong and profitable fourth quarter. We also are currently forecasting all of Kratos to return to positive cash flow generation in 2018."

Mr. DeMarco concluded, "We continue to believe that Kratos' position as a leader in innovation
and the rapid development and delivery of technology rich products and solutions is a clear differentiator with many DoD customers today. We are demonstrating this leadership position in strategic focus areas, including satellite communications, microwave electronics, cyber security, missile defense, training systems and high performance, jet powered unmanned aerial drone systems. We believe that we have the right products to address today's mission critical National Security requirements at an affordable cost."

Management will discuss the Company's third quarter 2017 financial results, fourth quarter guidance and fiscal year 2017 guidance in a conference call beginning at 2:00 p.m. Pacific (5:00 p.m. Eastern) today. Analysts and institutional investors may participate in the conference call by dialing (866) 393-0674,
and referencing the call by ID number 1146136. The general public may access the conference call by dialing (877) 344-3935 or on the day of the event by visiting www.kratosdefense.com for a simultaneous webcast. A replay of the webcast will be available on the Kratos web site approximately two hours after the conclusion of the conference call.

About Kratos Defense & Security Solutions

Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) develops transformative, affordable technology for the Department of Defense
and commercial customers. Kratos is changing the way breakthrough technology for these industries is brought to market through proactive research and a streamlined development process. Kratos specializes in unmanned systems, satellite communications, cyber security/warfare, microwave electronics, missile defense, training and combat systems. For more information go to www.kratosdefense.com.

Notice Regarding Forward-Looking Statements

This news release contains certain forward-looking statements that involve risks and uncertainties, including, without limitation, express or implied statements concerning the Company's
expectations regarding its future financial performance, including the Company's expectations concerning the quarterly trajectory of 2017 revenue and Adjusted EBITDA and ability to generate positive cash flow in 2018, the Company's ability to achieve projected growth in certain of the Company's business units and the expected timing of such growth, its bid and proposal pipeline, demand for its products and services, including the Company's ability to successfully compete in the tactical unmanned aerial system area and expected new customer awards, performance of key contracts, including the timing of production and demonstration related to certain of the Company's contracts and product offerings, the impact of the Company's restructuring efforts and cost reduction measures, including its ability to improve profitability and cash flow in certain business units as a result of these
actions, benefits to be realized from the Company's net operating loss carryforwards and the availability and timing of government funding for the Company's offerings, timing of LRIP related to the Company's unmanned aerial target system offerings, as well as the level of recurring revenues expected to be generated by these programs once they achieve full rate production, and market and industry developments. Such statements are only predictions, and the Company's actual results may differ materially from the results expressed or implied by these statements. Investors are cautioned not to place undue reliance on any such forward-looking statements. All such forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update or revise these statements, whether as a result of new information, future events or otherwise. Factors that may
cause the Company's results to differ include, but are not limited to: risks to our business and financial results related to the reductions and other spending constraints imposed on the U.S. Government and our other customers, including as a result of sequestration, the Federal budget deficit and Federal government shut-downs; risks of adverse regulatory action or litigation; risks associated with debt leverage and expected cost savings and cash flow improvements expected as a result of the refinancing of our Senior Notes and the repurchase of Senior Notes; risks that our cost-cutting initiatives will not provide the anticipated benefits; risks that changes, cutbacks or delays in spending by the U.S.DoD may occur, which could cause delays or cancellations of key government contracts; risks of delays to or the
cancellation of our projects as a result of protest actions submitted by our competitors; risks that changes may occur in Federal government (or other applicable) procurement laws, regulations, policies and budgets; risks of the availability of government funding for the Company's products and services due to performance, cost growth, or other factors, changes in government and customer priorities and requirements (including cost-cutting initiatives, the potential deferral of awards, terminations or reduction of expenditures to respond to the priorities of Congress and the Administration, or budgetary cuts resulting from Congressional committee recommendations or automatic sequestration under the Budget Control Act of 2011, as amended); risks of increases in the Federal government initiatives related to in-sourcing; risks related to security breaches, including cybersecurity
attacks and threats or other significant disruptions of our information systems, facilities and infrastructures; risks related to our compliance with applicable contracting and procurement laws, regulations and standards; risks relating to contract performance; risks related to failure of our products or services; risks associated with our subcontractors' or suppliers' failure to perform their contractual obligations, including the appearance of counterfeit or corrupt parts in our products; changes in the competitive environment (including as a result of bid protests); failure to successfully integrate acquired operations and competition in the marketplace, which could reduce revenues and profit margins; risks that potential future goodwill impairments will adversely affect our operating results; risks that anticipated tax benefits will not be realized in accordance with our
expectations; risks that a change in ownership of our stock could cause further limitation to the future utilization of our net operating losses; risks that the current economic environment will adversely impact our business; and risks related to natural disasters or severe weather. These and other risk factors are more fully discussed in the Company's Annual Report on Form 10-K for the period ended December 25, 2016, and in our other filings made with the Securities and Exchange Commission.

Note Regarding Use of Non-GAAP Financial Measures

This news release contains non-GAAP financial measures, including Adjusted income (loss) per share (computed using income (loss) from continuing operations before income taxes, excluding amortization of intangible assets and capitalized
contract and development costs, stock compensation expense, loss on extinguishment of debt, contract design retrofit costs, acquisition and restructuring related items and other which includes but is not limited to unused office space expense, excess capacity, investments in unmanned combat systems initiatives, and foreign transaction gains and losses, less the estimated tax cash payments) and Adjusted EBITDA (which excludes, among other things, losses and gains from discontinued operations, restructuring and transaction related items, investments in unmanned combat systems initiatives, stock compensation expense, unused office space expense, and foreign transaction gains and losses, and the associated margin rates). Kratos believes this information is useful to investors because it provides a basis for measuring the Company's available capital resources, the actual and
forecasted operating performance of the Company's business and the Company's cash flow, excluding extraordinary items and non-cash items that would normally be included in the most directly comparable measures calculated and presented in accordance with generally accepted accounting principles. The Company's management uses these non-GAAP financial measures along with the most directly comparable GAAP financial measures in evaluating the Company's actual and forecasted operating performance, capital resources and cash flow. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and investors should carefully evaluate the Company's financial results calculated in accordance with GAAP and reconciliations to those financial statements. In addition, non-GAAP financial measures as reported by
the Company may not be comparable to similarly titled amounts reported by other companies. As appropriate, the most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the Company's financial results prepared in accordance with GAAP are included in this news release.